2 Overbought Stocks to Drop

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James Montier is one of the he sharpest value investors and market strategists around the financial world. His book on value investing and behavioral investing are in the stack I keep close to the desk for constant reference.

Down Arrow stocks to sellThese days, he hangs his hat at GMO Capital alongside Jeremy Grantham. Mr. Montier was recently interviewed by Swiss business magazine Finanz und Wirtschaft about the condition of the markets today.

What Montier said should give you pause as you reach for the buy button to buy that glamor stock you have been chasing higher into year end. He told the magazine, “For all purposes, this is a hideously expensive market. I don’t care if it’s a bubble or not. It’s too expensive, and I don’t need to own it.”

No one knows precisely when a hideously expensive market will roll over and head in a more Southerly direction, especially in a world of benevolent Central Bank actions. However if and when it does, anyone caught owning stocks that are hideously expensive could pay a tremendous price for owning these all-too-popular pricey stocks. Recall that the internet bubble went higher, further and longer than anyone could have rationally expected — but when it did pop, fortunes were lost and lives were ruined.

Owning stock with super high valuations after an extended five year bull market could end the same way.

Under Armour (UA)

Under Armour (UA) is a great example of this kind of stock. This is a fantastic company with good products. I have friends who won’t wear anything else unless they have to dress up for some function or another. Management has done a fantastic job of growing the company, but at this point I think the stock has been rewarded a little too well for Under Armour’s success.

UA stock currently fetches 87 times earnings and more than 50 times the (always accurate) analyst forecasts for 2015 earnings. If Under Armour misses an earnings estimate or sees margins squeezed by an unexpected rise in material or labor costs, this stock could tumble very far very quickly. It’s a good company whose shares trade at a hideous valuation.

Netflix (NFLX)

Netflix (NFLX) is another example of high-risk, hideously valued stock that most investors should avoid. For the record, I love Netflix. My wife and I have become devotees of binge-watching several different shows, and we cannot wait until the new series of House of Cards comes out.

However, as good as the company may be, I can think of no reason this stock should trade for 90 times earnings and 72 times analyst expectations for next year. Even if NFLX hit the optimistic numbers, the stock will still be trading at price to earnings growth ratio of almost 2. It is a solid company with a badly overpriced stock right now.

Bottom Line

Owning these hypervalued stocks is a bet that everything continues to go exactly right for these companies and that some else is going to be willing to buy your shares at an even more ridiculous valuation. Should we see a market decline in 2015, these stocks will the first to be dumped by the big institutions and shares could suffer dramatic and possible permanent declines in value.

Don’t let hideously overvalued stocks expose you to hideous losses in 2015.

As of this writing, Tim Melvin did not hold a position in any of the aforementioned, hideously overvalued securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/12/overbought-stocks-stay-away/.

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